00:00any when we're going to stick with high quality here. What are the implications of higher rates you know with
00:05the 30 year hitting 5.12 percent
00:07the 10 year yield now approaching 4.6 percent on investment grade. Yes. Higher rates have actually been perhaps counterintuitively
00:17a draw for higher
00:19quality investment graded investors. And we've seen reasonably strong demand for USIG really any time it's above five percent given
00:28the move higher
00:29rates today. We're actually seeing spreads that are somewhat stable perhaps one to two basis points wider in USIG. Now
00:36the flip side of that of course is
00:38the borrowing cost dynamic. And we all know that issuance has already been quite robust in USIG this year and
00:44is expected to remain so as we see
00:47continued hyperscaler capex and a wide range of other companies also leaning on the debt capital markets. And that is
00:54going to have pretty
00:55meaningful implications for borrowing costs if rates stay around current levels. The last thing I note is just from an
01:02all in total
01:03return perspective you are getting compensated pretty healthily to cash work further out the curve at this point. Right. I
01:11mean when it comes to
01:11demand if rates go much higher investment grade returns at least year to date will turn negative. And there's concern
01:17that retail
01:18investors who are big source of demand for IG will react negatively. Barry what happens if the Federal Reserve moves
01:25to hike
01:25interest rates. Oh I don't think that the worst Fed likely would. It would be a monstrous mistake and it
01:35would do almost nothing to
01:37slow the rate of inflation. What they're more likely to do certainly the Powell Fed wouldn't have done but should
01:45have done is to actually
01:47start shortening the duration of their Soma portfolio. I've viewed for a long time policy to be roughly 50 to
01:5675 basis points
01:57restrictive on the rate policy side but 50 to 75 basis points accommodative on the balance sheet side. Even this
02:05week during the
02:06quarterly refunding you know the Fed was buying a significant amount of threes tens and thirties. So that downward rate
02:12pressure is
02:13actually allowing all the hyperscalers to borrow roughly a half to three quarters of a percent below where they would
02:20be
02:20otherwise. So what the worst Fed really should do if they think that we're not going to resume core disinflation.
02:28I think we will. But if they
02:30decide we won't would be to actually start reinvesting treasuries into shorter term securities and trying to tighten the balance
02:39sheet not great policy. So when he let's bring it back to investment grades spreads are approaching levels last seen
02:45in
02:45January which were the tightest in 28 years. And I wonder what could cause spreads to widen at this point
02:52for those who are
02:53thinking that you know this is not sustainable. What changes that. Yeah I think that you have to have a
03:00really decisive move in a very
03:02meaningful way either higher in base rates or lower in base rates. Our inclination is that spread widening would be
03:10much more
03:11consistent with treasury yields gapping significantly lower. That would be indicative something has perhaps gone awry in the
03:17broader U.S. economy and leaving the Fed a bit behind the curve in terms of easing policy perhaps to
03:23support the labor market.
03:25Alternatively if the 10 year treasury all of a sudden gaps well above five percent and expectations are that the
03:31Fed will be a
03:32high-hiking rates with somewhat of an aggressive tightening bias. That could also drive some pretty significant
03:39spread widening. Although the reality of just where dollar prices are for U.S. investment grade does kind of leave
03:46a lid on how
03:47much spread widening you can see in a rising rates environment. So Winnie Alphabet as we mentioned has been on
03:52a global
03:53issuance spree. Almost half of its bond debt has been issued outside of the U.S. When you have these
03:58U.S.
03:59hyperscalers fanning out across the globe like this what kind of disruptions do they cause for local companies who rely
04:05on their
04:06home markets for funding. I would imagine that this might be a threat.
04:10Yeah that's a really interesting nuance. And I would say that right now there is still a tremendous amount of
04:17demand especially in the
04:19primary markets. And oftentimes investors outside the U.S. welcome deals from U.S. companies because they're usually large they're
04:28liquid they're
04:29kind of well-known household issuers. And there is this kind of delicate balance of the crowding out effect leaving
04:36local issuers a little bit on the sidelines.
04:39But I would say that most U.S. companies that are going into other markets like all of the U
04:44.S. issuance that we've seen in the
04:46euro market the past 18 plus months are capitalizing on really just a widespread demand for new paper across a
04:54wide range of
04:55different company types. And Barry over to you there's also what we're seeing right now is also different from previous
05:02multinational bond sales across multiple currencies because in the past there were often these one-time financings tied to
05:08funding major acquisitions. But the AI build-out is very different and this will not be a one-time thing.
05:14Hyperscalers will be tapping the bond market over and over again including foreign currency markets. At what point do you
05:20think
05:20there might just be too many bonds?
05:23Yeah I think this is this is sort of my lens into how we think about when the AI boom
05:31you know
05:31infrastructure build-out is complete. And so there's a couple of metrics I'm watching closely. One
05:37would be CapEx to cash flow. In 2000 CapEx to cash flow for the telecom sector all the baby bells
05:45and
05:45everybody else building out the infrastructure of the internet got to 80 percent you know and the build-out
05:52of supply exceeded demand and we had a credit event. The same thing happened in the energy sector in 2014
05:58-2015.
05:59Right now expected CapEx to cash flow for the communication services sector or a lot of these
06:07hyperscalers around 60 percent but their underlying businesses are far more resilient growing far faster
06:14than was the case with baby bells in 2000 or the energy sector which is always you know extremely
06:19volatile. So we have some distance to go and you'd also expect to see at that point when you start
06:26getting close to saturation credit spreads spreads start to widen impact in the broader market. We had
06:32the biggest when you can correct me if I'm wrong about this but as far as I can tell April
06:37was the biggest
06:38issuance month for IG credit ever. It's something I expected and it didn't widen credit spreads
06:44significantly other than there was a bit of a war going on. And so we really are some distance from
06:50that saturation point you know 1999 or 2000 in the Dan Ives analog sort of scenario. So I think we
06:59have
06:59some ways to go. Okay Winnie do you see evidence of borrower discipline emerging? Are enough of them
07:06for instance issuing equity to defend their credit ratings? Yeah I think that for the companies that
07:13realize they might be a little bit puspier in terms of rating agency action or even investor perception
07:20of what they're doing. There has been a lot of kind of proactive speaking to investors trying to manage
07:27balance sheet policy. One thing that we're observing a lot especially in the utility sector which of course
07:31is key to the AI infrastructure is a surge in hybrid issuance which allows for some equity credit as well
07:38and has been very well received by the investor community. So I do think that companies are trying
07:43to take an approach that balances the reality of a need for a tremendous amount of new issue supply to
07:49fund the build out and also trying to be a bit protective of ratings especially in a higher yield
07:55environment where it really matters if you are a single a to triple b to double b borrower. Barry you
08:01mentioned telecoms back in the 90s. Our James Crombie has pointed out that spreads on investment grade tech
08:07are now converging with spreads on telecom debt which of course have long traded at wider spreads versus
08:13tech. What does that tell you about demand. Is there potentially some buyers fatigue here showing up. Well I mean
08:22we
08:22have a global fixed income demand problem. You know we've got unwinding of even far more aggressive balance sheet
08:31to rate suppression policies in Japan. The ECB was overly aggressive. The German debt break is no more.
08:39The UK government is driving themselves into a ditch. We're running government spending at 23 percent of GDP
08:46and global capital flows related to trade are getting restructured. When the biggest you know bilateral
08:55trade imbalance was the U.S. to China that money went into U.S. fixed income. That's no longer the
09:00case.
09:00So you know you've got all sorts of disruptions here in terms of global fixed income demand.
09:06That's why we're seeing something of that real rate shock we're having this morning.
09:10I'm not particularly sanguine about the outlook for all that. Unless the U.S. gets its fiscal house in order
09:16and drives spending back to 20 percent of GDP this problem is only going to be more acute. Right now
09:22interest costs as a percent of GDP have been stable because the Trump administration slowed
09:27government spending growth from 11 percent in fiscal 24 to 3. But you know the outlook is still you know
09:35pretty bleak.
09:37You
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